Focus List earnings review
Alaska Air Group ($46; ALK) said June-quarter earnings per share surged 53% to $1.13 excluding special items, topping the consensus of $1.11. Operating revenue advanced 9% to $1.38 billion as Alaska increased capacity 5%. Management expects capacity to climb 8% in the September quarter and more than 10% in the December quarter, leading to 7% growth for the year. That capacity growth, combined with rising competition from Delta Air Lines ($38; DAL) in key markets, stoked investor fears that airfares and profit margins could come under fire.
Although shares plunged 9% on the report, they have since recovered some of the lost ground and remain up 16% since we first recommended them in February. The stock trades at 15 times trailing earnings, a 21% discount to the median for S&P 1500 airline stocks. Alaska Air, earning an Overall score of 99, remains a Focus List Buy and a Long-Term Buy.
Ameriprise Financial's ($121; AMP) per-share operating earnings jumped 23% to $2.08, exceeding the consensus estimate by $0.07. Net revenue increased 12% to $3.07 billion, driven by 12% growth for fees related to financial advice and wealth management. Assets under management for the asset-management segment rose 13% to $518 billion from a combination of market appreciation and net inflows of $4.4 billion. Ameriprise is a Focus List Buy and a Long-Term Buy.
Lear ($97; LEA) shares rallied after the auto-parts maker reported per-share profits of $2.12 excluding special items in the June quarter, up 31% and comfortably ahead of the consensus of $1.97. Sales climbed 11% to $4.59 billion, also exceeding analysts' expectations. Lear continues to capitalize on favorable industry trends as manufacturers cram more electrical content into vehicles. Lear's electrical unit posted 9% higher sales, while the seating business grew 12%. Citing stronger vehicle production than it had previously anticipated, Lear raised its full-year guidance for sales, operating earnings, and free cash flow. Lear is a Focus List Buy and a Long-Term Buy.
Union Pacific ($100; UNP) grew per-share profits 21% to $1.43 in the June quarter, in line with the consensus. Operating revenue increased 10% to $6.02 billion on growth across all six freight categories, including gains of 19% for agriculture, 16% for industrial products, and 16% for intermodal. Total volume rose 8%, core pricing 2.5%.
Union Pacific declined to issue guidance for the second half of 2014. But management implied it expects strong growth in coming quarters. The railroad plans to hire a net 1,000 workers this year, while adding more locomotives to its fleet. It also noted that tightness in the trucking market has given railroads leeway to raise their prices. Union Pacific is a Focus List Buy and a Long-Term Buy.
In the June quarter, Whiting Petroleum ($88; WLL) earned $1.40 per share, up 37%, to top the consensus by $0.12. Revenue surged 26% to $836 million, ahead of the consensus of $798 million. Total production exceeded management's guidance by climbing 18% on a 20% surge from oil. Results also benefited from higher realized sales prices for oil, natural gas, and natural-gas liquids. Management now expects 2014 production to rise 19% to 20%, compared to its prior target of 17% to 19%. Whiting Petroleum is a Focus List Buy and a Long-Term Buy.
Additional earnings reports
For the June quarter, Aetna ($82; AET) posted operating earnings of $1.69 per share, up 4% and $0.09 above the consensus. Operating earnings exclude a slew of costs; net income of $1.52 per share fell $0.08 short of the consensus. Revenue jumped 26% to $14.51 billion, well ahead of the consensus of $13.99 billion. Results benefitted from Aetna's $7.3 billion acquisition of Coventry in May 2013. Aetna says integration of Coventry's business is tracking ahead of schedule.
Aetna's medical membership rose 2% from the end of March to 23.1 million. The company also announced plans to join Georgia's public exchanges under the Affordable Care Act, which would be its 17th state. However, the health insurer reported higher medical costs. And though Aetna raised its guidance for full-year profits, the midpoint of its profit-estimate range still trails the consensus. Aetna's stock slipped on the report. Aetna is a Long-Term Buy.
UGI ($50; UGI) grew June-quarter earnings per share 36% to $0.15 excluding special items, missing the consensus by $0.02. Sales advanced 8% to $1.49 billion on growth across all four businesses, including an 11% gain at the international unit. UGI continues to expect per-share profits of $2.95 to $3.05 for fiscal 2014 ending September, implying 20% to 24% growth and exceeding the consensus of $2.94.
UGI announced a 3-for-2 stock split, set to occur on Sept. 5. It also raised its quarterly dividend 10% to a post-split level of $0.2175 per share, payable Oct. 1. This is UGI's second dividend hike in 2014; it announced a 4% increase in April. Management reiterated its long-term target of growing per-share profits 6% to 10% annually and boosting its dividend 4% a year. UGI is a Buy and a Long-Term Buy.
Troubles brewing in China
Qualcomm's ($75; QCOM) stock has remained under pressure since the company issued disappointing guidance for the September quarter. The weak outlook partly reflects Qualcomm's troubles receiving royalty payments in China — Qualcomm is in the middle of a contract dispute with an important Chinese smartphone vendor. The American firm also claims some Chinese companies are underreporting sales of smartphones that use Qualcomm-licensed technology. Qualcomm said it could face royalty shortfalls on 13% to 20% of the 1.3 billion devices it expects shipped in the current calendar year. Other companies could follow suit while Chinese officials investigate claims that Qualcomm is overcharging Chinese smartphone makers.
China's antitrust regulator has reportedly already determined Qualcomm is operating a monopoly. For the moment, it has stopped short of openly accusing the company of abusing its powers, but investigations are ongoing. Desperate to repair its relationships in the country, Qualcomm launched a $150 million fund to invest in Chinese ventures. Chinese officials also opened an antitrust investigation into Microsoft's ($44; MSFT) Windows operating system. Qualcomm is a Buy and a Long-Term Buy. Microsoft is rated A (above average).
The U.S. Commerce Department has reportedly postponed approval of additional applications to export crude oil, possibly to give the government more time to put together specific rules. U.S. officials permitted two companies to export lightly processed oil earlier this year, prompting speculation that the U.S. would ease its stance on a ban on crude-oil exports that has existed since the 1970s.
Google ($594; GOOGL) is reportedly considering the purchase of Spotify, a service that streams music, though the two companies remain far apart on the company's value. According to published reports, Spotify seeks a price in excess of $10 billion, more than twice what Google may be prepared to pay. Google is a Focus List Buy and a Long-Term Buy.
Dover ($87; DOV) acquired The WellMark Company, a leading maker of valves, instrumentation and chemical injection pumps for the oil and gas industry. WellMark is expected to generate $55 million in sales this year. Dover is a Long-Term Buy.
No changes were made this week in Dow Theory Forecasts.